Brexit: financial reporting implications

Brexit: financial reporting implications

Transparent business model disclosure and clarity over longer-term strategy will be more important than ever during this period of uncertainty.

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It will be some time before the longer-term effects of the UK referendum result become clear. However, in the short-term, elevated geopolitical instability and economic uncertainty will result in increased market volatility for asset prices and exchange rates.

As a consequence, audit committees will be assessing the impact of this uncertainty on interim and annual financial statements; and ensuring management are monitoring developments to assess what impact, if any, these have on the business model, strategy, business plans, forecasts and financial reporting.

Communicating impacts and implications

As the UK moves towards an exit from the EU, investors will want to understand how business models of companies active on UK markets are exposed to each new opportunity and risk. Transparent business model disclosure and clarity over longer-term strategy will be more important than ever during this period of uncertainty. In both annual and half-yearly reporting, companies may need to reassess their principal risk disclosures in the context of the changed global business environment.

The focus on communication of the implications of the referendum result also extends into financial statements. Companies should consider whether their front-end narrative provides sufficient information to allow the implications of uncertainties, exit terms and strategic responses to be assessed.

Accounting in an environment of uncertainty and market volatility

Uncertainty and volatility put particular pressure on financial statement measures and forward-looking assessments. There are various factors to consider:

  • Updating cash flows in value in use calculations: while long term implications may not be clear, and there are limitations on taking any planned restructurings into account, cash flow forecasts may still need updating to reflect changes in the competitive environment, growth rates or exchange rate implications. 
  • Determining discount rates: incorporating changes in risks and market conditions. 
  • Determining which assets are tested for impairment: do changes in the market, or in internal expectations mean that more assets need to be tested for impairment? 

Valuations of assets or liabilities, such as properties, pension balances, or financial instruments will also be affected by market activity. Together with foreign exchange implications, variability in such valuations could be one of the greatest areas of focus as users look at the impact on financial statement balances.

June year ends and half-yearly reports

For 30 June year ends or half year reports, valuations and estimates involving observable market transactions may have more limited available relevant information at that date, and updated valuations may be required.

Half-yearly reports at this date could be expected to include additional discussion of factors relating to the referendum result. Is the required explanation of events relevant to understanding the position of the entity complete - particularly where exchange rates have a significant impact, circumstances affect the fair value of financial instruments or where estimates have changed.

Audit considerations

Audit plans - both internal and external - may need to be revisited in the light of the UK referendum result.

For internal audit (and other internal assurance providers), question whether the plan continues to be focused on the key risks facing the business. 

Question whether the external auditors are still focused on the right audit risks.

Consider whether the audit should be deploying more specialist expertise in the light of the impact on pensions, financial instruments and other valuations.

Are your auditors keeping you appraised of how their audit plans are changing? Do the changes accord with your understanding of how the uncertainties associated with Brexit are impacting your business model, strategy and the principal risks facing the business?

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